Quantitative Analysis Overview

Transcription

1 Quantitative Analysis Overview card SM System Methodology The card SM System methodology incorporates both quantitative and qualitative factors in evaluating fund managers and their investment strategies. The card SM System is built around pass/fail criteria, on a scale of to (with being the best) and has the ability to measure Active, Passive and Asset Allocation investing strategies. Active and Asset Allocation strategies are evaluated over a five year time period, and Passive strategies are evaluated over a three year time period. Eighty percent of the fund s score is quantitative (made up of eight unique factors), incorporating modern portfolio theory statistics, quadratic optimization analysis, and peer group rankings (among a few of the quantitative factors). The other 2% of the score is qualitative, taking into account things such as manager tenure, the fund s expense ratio relative to the average fund expense ratio in that asset class category, and the fund s strength of statistics (statistical significance). Other criteria that may be considered in the qualitative score includes the viability of the firm managing the assets, management or personnel issues at the firm, and/or whether there has been a change in direction of the fund s stated investment strategy. The following pages detail the specific factors for each type of investing strategies. Combined, these factors are a way of measuring the relative performance, characteristics, behavior and overall appropriateness of a fund for inclusion into a plan as an investment option. General fund guidelines are shown in the card Point System table below. The card Point System is meant to be used in conjunction with our sample Investment Policy Statement, in order to help identify what strategies need to be discussed as a watch-list or removal candidate; what strategies continue to meet some minimum standards and continue to be appropriate; and/or identify new top-ranked strategies for inclusion into a plan. card Point System Good: Acceptable: Watch List: Poor: - Points 7- Points 5- Points - Points Sample card Summary and investment report excerpt 2. Retirement Plan Advisory Group. All rights reserved. RPAG-2-5

2 Quantitative Analysis Evaluation Criteria Active strategies are investment strategies where the fund manager is trying to add value and out-perform the market averages (for that style of investing). Typically, these investment strategies have higher associated costs due to the active involvement in the portfolio management process by the fund manager(s). For this type of investment strategy, the card SM System is trying to identify those managers who can add value on a consistent basis within their own style of investing. Quantitative Factors (-): ) Analysis: s-based analysis to determine the style characteristics of a fund over a period of time. Fund passes if it reflects the appropriate style characteristics. analysis helps ensure proper diversification in the plan. Factors 3% 2) : s-based analysis to determine the behavior of the fund/manager over multiple (rolling) time periods. Fund passes if the fund exhibits a consistent style pattern. consistency is desired so that funds can be effectively monitored within their designated asset class. 3) R-Squared: Measures the % of a fund s returns that are explained by the benchmark. Fund passes with an R2 > %. This statistic measures whether the benchmark used in the analysis is appropriate. ) : Fund passes if its risk is less than the benchmark or its return is greater than the benchmark. Favorable risk/return characteristics are desired. Factors 3% 5) Up/ Capture Analysis: Measures the behavior of a fund in up and down markets. Fund passes with an up capture > its down capture. This analysis measures the relative value by the manager in up and down markets. ) rmation : Measures a funds relative risk and return. Fund passes if ratio is >. This statistic measures the value added above the benchmark, adjusted for risk. 7) ) s ing: Fund passes if its median rank is above the 5 th percentile. rmation ing: Fund passes if its median rank is above the 5 th percentile. This ranking ranks risk adjusted excess return. ings 2% Qualitative Factors (-): -) Two points may be awarded based on qualitative characteristics of the fund. Primary considerations are given to manager tenure, fund expenses and strength of statistics, however, other significant factors may be considered. It is important to take into account non-quantitative factors, which may impact future performance. Qualitative Factors 2% 2. Retirement Plan Advisory Group. All rights reserved. RPAG-2-5

3 Quantitative Analysis - Passive Strategies Evaluation Criteria Passive strategies are investment strategies where the fund manager is trying to track or replicate some area of the market. These types of strategies may be broadbased in nature (e.g., the fund manager is trying to track/replicate the entire U.S. equity market like the S&P 5) or may be more specific to a particular area of the market (e.g., the fund manager may be trying to track/replicate the technology sector). These investment strategies typically have lower costs than active investment strategies due to their passive nature of investing and are commonly referred to as index funds. For this type of investment strategy, the card SM System is focused on how well these managers track and/or replicate a particular area of the market with an emphasis on how they compare against their peers. Quantitative Factors (-): ) Analysis: s-based analysis to determine the style characteristics of a fund over a period of time. Fund passes if it reflects the appropriate style characteristics. analysis helps ensure proper diversification in the plan. 2) : s-based analysis to determine the behavior of the fund/manager over multiple (rolling) time periods. Fund passes if the fund exhibits a consistent style pattern. consistency is desired so that funds can be effectively monitored within their designated asset class. & Tracking Factors % 3) R-Squared: Measures the % of a fund s returns that are explained by the benchmark. Fund passes with an R2 > 5%. This statistic measures whether the benchmark used in the analysis is appropriate. ) Tracking Error: Measures the % of a fund s excess return volatility relative to the benchmark. Fund passes with a TE <. This statistic measures how well the fund tracks the benchmark. 5) Tracking Error ing: Fund passes if its median rank is above the 75 th percentile. ings ) Expense ing: Fund passes if its median rank is above the 75 th percentile. % 7) s ing: Fund passes if its median rank is above the 75 th percentile. ) Sharpe ing: Fund passes if its median rank is above the 75 th percentile. Qualitative Factors (-): -) Two points may be awarded based on qualitative characteristics of the fund. Primary considerations are given to fund expenses and strength of statistics, however, other significant factors may be considered. It is important to take into account non-quantitative factors, which may impact future performance. Qualitative Factors 2% 2. Retirement Plan Advisory Group. All rights reserved. RPAG-2-5

4 Quantitative Analysis Asset Allocation Strategies Evaluation Criteria Asset allocation strategies are investment strategies that invest in a broad array of asset classes that may include U.S. equity, international equity, emerging markets, real estate, fixed income, high yield bonds and cash (to name a few asset classes). These strategies are typically structured in either a risk-based format (the strategies are managed to a level of risk, e.g., conservative or aggressive) or, in an age-based format (these strategies are managed to a retirement date or life expectancy date, typically growing more conservative as that date is approached). For this type of investment strategy, the card SM System is focused on how well these managers can add value from both asset allocation and manager selection. Quantitative Factors (-): ) Risk Level: The fund s standard deviation is measured against the category it is being analyzed in. The fund passes if it falls within the range for that category. Factors 3% 2) Diversity: Fund passes if it reflects appropriate style diversity (returns-based) among the four major asset classes (Cash, Fixed Income, U.S. & International Equity) for the given category. 3) R-Squared: Measures the % of a fund s returns that are explained by the benchmark. Fund passes with an R2 > %. This statistic measures whether the benchmark used in the analysis is appropriate. ) : Fund passes if its risk is less than the benchmark or its return is greater than the benchmark. Favorable risk/return characteristics are desired. Factors 3% 5) Up/ Capture Analysis: Measures the behavior of a fund in up and down markets. Fund passes with an up capture > its down capture. This analysis measures the relative value by the manager in up and down markets. ) rmation : Measures a funds relative risk and return. Fund passes if ratio is >. This statistic measures the value added above the benchmark, adjusted for risk. 7) ) s ing: Fund passes if its median rank is above the 5 th percentile. Sharpe ing: Fund passes if its median rank is above the 5 th percentile. This ranking ranks risk adjusted excess return. ings 2% Qualitative Factors (-): -) Two points may be awarded based on qualitative characteristics of the fund. Primary considerations are given to manager tenure, fund expenses and strength of statistics, however, other significant factors may be considered. It is important to take into account non-quantitative factors, which may impact future performance. Qualitative Factors 2% 2. Retirement Plan Advisory Group. All rights reserved. RPAG-2-5

5 Qualitative Analysis Overview Evaluation Criteria The Qualitative review process is structured in its approach and designed to identify the factors that will ultimately drive future investment performance. The primary three factors include People, Process and Philosophy. Baseline criteria are set for each: ) People - experienced team with ability to manage both philosophy and process; 2) Process - clearly defined and consistently applied. The implementation of a strategy may be just as, if not, more important than the ideas and research supporting it and 3) Philosophy - the research and ideas must be coherent and persuasive with a strong rationale supporting past results and future performance expectations. The qualitative analysis helps support or confirm the quantitative analysis. PEOPLE Organizational/Leadership/Firm Changes Portfolio Managers/Management Team Experience and Ability PROCESS Sound and Established Clearly Defined Consistently Applied PHILOSOPHY Coherent Persuasive Strong nale The Qualitative Review helps support and/or confirm the Quantitative Analysis by providing color and insight into the portfolio and investment performance. 2. Retirement Plan Advisory Group. All rights reserved. RPAG-2-5

6 Disclosures and Notes Investment objectives and strategies vary among fund, and may not be similar for funds included in the same asset class. Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. The performance data quoted may not reflect the deduction of additional fees, if applicable. If reflected, additional fees would reduce the performance quoted. Performance data is subject to change without prior notice. Performance of indexes reflects the unmanaged result for the market segment the selected stocks represent. Indexes are unmanaged and not available for direct investment. The information used in the analysis has been taken from sources deemed to be reliable, including, third-party providers such as Markov Processes International, Morningstar, firms who manage the investments, and/or the retirement plan providers who offer the funds. Every reasonable effort has been made to ensure completeness and accuracy; however, the final accuracy of the numbers and information is the responsibility of the investment manager(s) of each fund and/or the retirement plan providers offering these funds. Discrepancies between the figures reported in this analysis, and those reported by the actual investment managers and/or retirement plan providers, may be caused by a variety of factors, including: Inaccurate reporting by the manager/provider; Changes in reporting by the manager/provider from the time this report was prepared to a subsequent retro-active audit and corrected reporting; Differences in fees and share-classes impacting net investment return; and, Scriveners error preparing this report. Fund scores will change as the performance of the funds change and as certain factors measured in the qualitative category change (e.g., manager tenure). Fund scores are not expected to change dramatically from each measured period, however, there is no guarantee this will be the case. s will change depending on the changes in the underlying prespecified card factors. Neither past performance or statistics calculated using past performance are a guarantee of a fund s future performance. Likewise, a fund s score using Retirement Plan Advisory Group s card SM System does not guarantee the future performance or style consistency of a fund. Fund selection is at the discretion of the investment fiduciaries, which are either the plan sponsor or the committee appointed to perform that function. Cash Equivalents (e.g., money market fund) and some specialty funds are not scored by the card SM System. The enclosed Investment Due Diligence report and card is not an offer to sell mutual funds. An offer to sell may be made only after the client has received and read the appropriate prospectus. For the most current month-end performance, please contact Retirement Plan Advisory Group at (77) 3-2. Carefully consider the investment objectives, risk factors and charges and expenses of the investment company before investing. This and other information can be found in the fund s prospectus, which may be obtained by contacting your Investment Advisor/Consultant or Vendor/Provider. Read the prospectus carefully before investing. For a copy of the most recent prospectus, please contact your Investment Advisor/Consultant or Vendor/Provider. The enclosed Investment Due Diligence report, including the card SM System, is intended for plan sponsor and/or institutional use only. The materials are not intended for participant use. The purpose of this report is to assist fiduciaries in selecting and monitoring investment options. A fund s score is meant to be used by the plan sponsor and/or fiduciaries as a tool for selecting the most appropriate fund. 2. Retirement Plan Advisory Group. All rights reserved. RPAG-2-5

7 card Asset Allocation Strategies Assets Conservative Risk Level Diversity k Exchange Current Lineup SR HArtford Fixed Fund $53, Moderate Conservative MFS Conservative Allocation R2 $,.35 MCARX Moderate MFS Moderate Allocation R2 $33,7.5 MARRX American Funds American Balanced A $7,3.5 ABALX Hartford Brokerage Access Account $35, / 5../ / /.3 3.3/ / 2.7.5/.3 3.3/.5 7./ /3/22 2 3/3/22 2/3/2 /3/ MC 2 MOD 2 - MOD MC MOD MOD MC MA MOD MC MOD 5 MOD Moderate Aggressive MFS Growth Allocation R2 $23,27.55 MGALX Aggressive MFS Aggressive Growth Allocation R2 $,3.7 MAWAX /.2.3/ /. 2./ /.3./ MA E/S AGG MA AGG AGG AGG AGG AGG Large Cap Blend Assets American Funds Fundamental Investors A Large Cap Growth American Funds Growth Fund of Amer A $2,.5 ANCFX $3,7. AGTHX./ / / -.2.3/ -.5./../ /3/ LCB 2 3/3/22 7 LCB 2/3/2 LCB /3/2 LCB

8 card k Exchange Mid Cap Value Assets AllianceBern Small-Mid Cap Value R $2,7.3 ABSRX Mid Cap Growth Franklin Small-Mid Cap Growth A $32,.53 FRSGX Small Cap Blend Oppenheimer Main Street Sm & Mid Cap A International Large Cap Value $77,5. OPMSX AllianceBern Intl Val A $2,. ABIAX Global Equity American Funds Capital World G/I A $223,.2 CWGIX -55.3/ / / /. 3./ Current Lineup 2./. 23./. 2./ / / / 7.3.3/ 2../.3 5./.2./ E/S /3/22 7 MCV 2 T MCG 5 2 ILCV 2 GE 3/3/22 MCV MCG GE 2/3/2 MCV MCG GE /3/2 MCV MCG GE Multi-Sector Strategies Assets Multisector Bond Franklin Strategic Income A $3,3.57 FRSTX Risk Level. Diversity 2.5/ /..2/.3. SR /3/22 2 MSB 3/3/22 2/3/2 /3/ Passive Strategies Assets Large Cap Blend DWS Equity 5 Index S $22,5.2 BTX Total Assets as of /3/22: $5,, / Tracking Error. TE 3. Expense SR 2. /3/22 2 LCB-P 3/3/22 LCB 2/3/2 LCB /3/2 LCB

9 Box Analysis Value Blend Growth DWS Equity Dividend A (2) American Funds Fundamental Investors A (7) American Funds Growth Fund of Amer A () Large AllianceBern Small-Mid Cap Value R (7) Franklin Small-Mid Cap Growth A () Mid Oppenheimer Main Street Sm & Mid Cap A (5) Small Green: Funds to add Yellow: Funds to watch list Red: Funds to delete

10 Box Analysis International Global Core Fixed Income AllianceBern Intl Val A () American Funds Capital World G/I A () Cash Equivalent Specialty Specialty Fixed Income Franklin Strategic Income A () Low Asset Allocation Portfolios Conservative Moderate Conservative Moderate Moderate Aggressive Aggressive MFS Conservative Allocation R2 () MFS Moderate Allocation R2 () MFS Growth Allocation R2 () MFS Aggressive Growth Allocation R2 () American Funds American Balanced A () High Green: Funds to add Yellow: Funds to watch list Red: Funds to delete

11 Summary of Proposed Changes Large Cap Value Hartford Dividend & Growth HLS IA Hartford Dividend & Growth HLS IA HIADX -52.7/ /. 3.5/ /3/22 2 LCV 3/3/22 LCV 2/3/2 LCV /3/2 LCV Large Cap Growth Eliminate: TCW Select Equities I TCW Select Equities I American Funds Growth Fund of Amer A and map assets to TCW Select Equities I American Funds Growth Fund of Amer A TGCEX AGTHX./ / /..3/ -.5./.3./ /3/22 2 /3/22 2 3/3/22 3/3/22 2/3/2 2/3/2 /3/2 /3/2 Mid Cap Blend Lord Abbett Value Opportunities A Lord Abbett Value Opportunities A LVOAX -3.7/ / 2../ /3/22 2 MCB 3/3/22 MCB 2/3/2 MCB /3/2 MCB Small Cap Value Goldman Sachs Small Cap Value A Goldman Sachs Small Cap Value A GSSMX -52./ / / /3/22 2 SCV 3/3/22 SCV 2/3/2 SCV /3/2 SCV

12 Summary of Proposed Changes Small Cap Blend Eliminate: Lord Abbett Small Cap Value A Oppenheimer Main Street Sm & Mid Cap A and map assets to Lord Abbett Small Cap Value A Lord Abbett Small Cap Value A Oppenheimer Main Street Sm & Mid Cap A LRSCX OPMSX 2./ / /. 2./ -../ 3../ T T /3/22 /3/22 5 3/3/22 3/3/22 2/3/2 2/3/2 /3/2 /3/2 Small Cap Growth T. Rowe Price Small-Cap Stock T. Rowe Price Small-Cap Stock OTCFX 22.5/ /.3 5./ /3/22 2 SCG 3/3/22 2/3/2 /3/2 International Large Cap Value Eliminate: Templeton Foreign A AllianceBern Intl Val A Templeton Foreign A AllianceBern Intl Val A and map assets to Templeton Foreign A TEMFX ABIAX -3./ / / / -3.2./ / /3/22 2 ILCV /3/22 2 ILCV 3/3/22 3/3/22 2/3/2 2/3/2 /3/2 /3/2

13 Summary of Proposed Changes International Large Cap Blend Hartford International Opp HLS IA Hartford International Opp HLS IA HIAOX 52.3/ / -../ /3/22 2 ILCB 3/3/22 2/3/2 /3/2 International Large Cap Growth Oppenheimer International Growth A Oppenheimer International Growth A OIGAX 2./ / / /3/22 2 I 3/3/22 2/3/2 /3/2 International Small-Mid Cap Value Putnam International Capital Opp A Putnam International Capital Opp A PNVAX 5./ / / /3/22 2 ISMV 3/3/22 ISC 2/3/2 ISC /3/2 7 ISC Core Fixed Income JPMorgan Core Bond A JPMorgan Core Bond A PGBOX -3./ / / /3/22 2 CFI 3/3/22 CFI 2/3/2 CFI /3/2 CFI Multisector Bond Watchlist: Franklin Strategic Income A Multi-Sector Strategies Franklin Strategic Income A FRSTX Risk Level. Diversity 2.5/ /..2/.3. SR /3/22 2 MSB 3/3/22 2/3/2 /3/

14 Summary of Proposed Changes Stable Value MFS Cash Reserve MFS Cash Reserve CUST /3/22 3/3/22 2/3/2 /3/ Money Market JPMorgan Prime Money Market Inv JPMorgan Prime Money Market Inv JPIXX /3/22 3/3/22 2/3/2 /3/

15 Conclusion Watchlist Franklin Strategic Income A () Eliminate American Funds Growth Fund of Amer A () and map to TCW Select Equities I () Oppenheimer Main Street Sm & Mid Cap A (5) and map to Lord Abbett Small Cap Value A () AllianceBern Intl Val A () and map to Templeton Foreign A () Add Hartford Dividend & Growth HLS IA () TCW Select Equities I () Lord Abbett Value Opportunities A () Goldman Sachs Small Cap Value A () Lord Abbett Small Cap Value A () T. Rowe Price Small-Cap Stock () Templeton Foreign A () Hartford International Opp HLS IA () Oppenheimer International Growth A () Putnam International Capital Opp A () JPMorgan Core Bond A () MFS Cash Reserve JPMorgan Prime Money Market Inv Next Step: Implementing fund changes